On Monday October 7, 2013, the United States Supreme Court began its new term. The issue of severance pay tax will be one of the many issues heard by the Court during the 2013-2014 term.
At issue before the Court is whether severance pay that is provided to a former employee when employment ends should be subject to payroll taxes. While there seems to be little issue that the former employee is receiving pay and thus that severance pay is subject to income tax, there is a disagreement about whether the pay is for services rendered and thus subject to payroll tax.
More specifically, two United States Courts of Appeal cases disagree on the issue of payroll tax. The 6th Circuit held that severance pay is a supplement to unemployment and therefore not subject to FICA taxes in the case of United States v. Quality Stores, Inc., and the Federal Circuit held that severance pay should be considered wages in the case of CSX Corp. v. United States.
The United States Supreme Court will now hear the issue that affects both employers and employees. While employers and employees appear to be on the same side of this issue, the Internal Revenue Service (IRS) is on the opposite side and is arguing that severance pay should be treated the same as wages earned during the employment period.
If you have lost your job in Oklahoma and have questions about tax issues, please read our FREE article, “Tax Help for the Unemployed: The Effects of Job Loss on Taxes.”
Our Oklahoma tax lawyers will watch for the Supreme Court’s decision on severance pay tax and any other tax issues that may be decided this term.